Graduate tax: bad idea

Details of Business Secretary Vince Cable’s plans to introduce (or consider introducing) a ‘graduate tax’ to fund higher education remain unclear, but I think we’ve heard enough to conclude that it is a truly bad idea.

Now, there is one way in which a graduate tax would be sort-of OK. If we let universities charge fees at market rates, had the government pay the universities directly, and then taxed the graduates until they had repaid their fees plus interest, then the tax might make sense. Obviously you would also want to let people pay up front themselves for some or all of their fees, if they were willing and able to. That kind of graduate tax would help fund universities more effectively, and also encourage students to think seriously about the costs and benefits of their higher education choices.

But that kind of tax would really be no different from keeping a subsidized loan system like the one we have at the moment, and just lifting the cap on tuition fees. Moreover, it would also cause problems of its own. The predominance of third party payment (i.e. the government pays the fees) would disempower students and increase the State’s power over Britain’s universities. In that sense it would be a hugely retrograde step. Just as importantly, it would probably lead to massive inflation in the higher education sector (just as third-party payment has driven spiraling costs in the US healthcare). In other words, even a ‘good’ graduate tax wouldn’t qualify as good policy.

However, the government doesn’t even seem to be thinking about a ‘good’ graduate tax. Cable’s plan seems to be for all graduates to simply pay an additional, progressive income tax for a certain number of years after they graduate. In other words, the more you earn the more you’ll pay, regardless of the cost of your education. It’s not difficult to see the problem here. Someone who does an inexpensive course at a less prestigious university, but who works extremely hard and goes on to earn lots of money, will ending up paying through the nose. Meanwhile someone who does an expensive course at a fancy university, and spends three years partying before achieving nothing career-wise, will get off lightly. Talk about perverse incentives!

Ultimately, there is no substitute for introducing a genuine free market in higher education, as James Stanfield’s recent ASI book The Broken University argued. A graduate tax would be a big step in precisely the wrong direction.